On Wednesday, December 18th, the Federal Reserve announced a 25 basis point rate cut, but at the same time hinted that the pace of rate cuts would slow down next year.
Wednesday marked the final monetary policy meeting of 2024 for the Federal Reserve’s Federal Open Market Committee (FOMC). The Fed announced a reduction in the federal fund rate from the current range of 4.5%–4.75% to 4.25%–4.5%. This marks the Fed’s second consecutive rate cut, each time by 25 basis points.
The latest rate cut measures received approval from 11 out of 12 voting members, with one member casting a dissenting vote.
The Fed’s decision to continue cutting rates was in line with Wall Street expectations. Following the rate cut announcement, the stock market declined and treasury yields rose.
According to the latest projections released after the meeting, Fed officials expect fewer rate cuts in 2025. If the economy continues to grow steadily and inflation continues to decline, most officials anticipate two rate cuts in 2025. In September’s outlook, officials had projected around four rate cuts for the following year.
Officials also anticipate a decrease in the number of rate cuts in 2026, which would keep the federal fund rate at 3.4% two years from now, higher than the 2.9% forecasted in September.
In addition to lowering the federal fund rate, this time the Fed also reduced the overnight reverse repurchase (ON RRP) rate from 4.5% to 4.25%, a decrease of 30 basis points.
Federal Reserve Chairman Jerome Powell stated in a press conference after the meeting that officials’ voting decision was relatively unified, saying, “We believe this is the right decision.”
He mentioned that after reducing rates by a total of 100 basis points over the past year, the Fed can now “consider further adjustments to the policy rate more cautiously.”
President-elect Trump vows to increase tariffs on certain imported goods and crack down on illegal immigration starting in January next year.
Market concerns arise that the increase in import costs could be passed on to domestic prices, and strengthening immigration control may increase wage pressure in certain industries, ultimately making inflation control uncertain.
Powell acknowledged the difficulty in simulating the impact of tariffs but admitted that the current situation may be different from 2018–19.
During that time, Trump imposed broader tariffs on steel and aluminum and initiated a trade war with China. However, inflation rates in the US remained low that year without the predicted price hikes.
The US has experienced prolonged inflation during Biden’s term. Although inflation rates have notably decreased since mid-2023, price growth has slowed down unevenly and fluctuated in the past two months. However, consumers have been feeling the cumulative effect of price increases.
The Fed is at a crossroads, aiming to avoid unnecessarily cooling economic activity due to the aggressive rate hikes over the past two years, as both price and wage growth have cooled down.
Yet, they also do not want to undermine the recent progress made in inflation. Speculative asset prices (including tech stocks and bitcoin) have surged, potentially providing material for new spending and investments, enabling companies to raise prices.
The labor market currently remains in a delicate balance. Job openings are low, but so are layoff rates. Income growth has supported strong consumption, and Fed officials have been looking for signs that employment growth is stabilizing to maintain a stable unemployment rate.
The rate cut provides some immediate relief for consumers with credit card debt and small businesses linked to floating interest rates. However, as investors reduce their bets on significant rate cuts in the upcoming year, various long-term borrowing costs, including mortgage loans, car loans, and corporate debts, have shown increases over the past few months.